These 7% dividends prove that this investing “rule” is complete crap

Don’t fall into the trap of not being able to beat the market. it’s complete nonsense— and it doubles when you look at it outside to stocks and other assets.

Let’s take preferred stock as an example. Preferred stocks are a bond-equity hybrid that are traded on exchanges like stocks. However, like bonds, they trade around their face value.

The best thing is the income. Our favorite way to buy preferred products – actively managed (More on this later) Closed-end funds (CEFs) — yields of 7% or more.

And some preferred stock CEFs are currently trading below their net asset value (NAV, or portfolio value), with some of their discounts reaching double digits.

Preferred stock CEF finally outperforms benchmark everytimewe will soon see this fact in action.

Preferred Stock CEF: Has a track record of outperforming benchmarks (higher yield)

Scholars call the idea that you can’t beat the market the “efficient market hypothesis.” In 2013, economist Eugene F. Fama, who first proposed this hypothesis in its modern form, was awarded the Nobel Prize for his work on this theory. He won alongside Lars Peter Hansen, who performed extensive calculations supporting Pharma’s hypothesis.

Here’s where this story gets weird. Fama and Hansen shared the Nobel Prize with Robert Shiller, the third recipient of the award that year. Robert Shiller argued that the market is influenced by the market. do not have Although efficient, they often create bubbles, as we saw with the dot-com crash of the 1990s and the subprime mortgage crisis of the 2000s.

How can economists who passionately disagree with each other win the same prestigious award in the same year?

It just goes to show you how tricky investing can be.In fact, the market it’s not It is completely efficient and we often see fund managers outperforming their benchmarks over long periods of time. Preferred stock CEFs are a great example.

If you look at products that have a lifespan of 10 years or more, they all beat out passive types. iShares Preferred & Income Securities ETF (PFF) In the last 10 years.

I know there’s a lot going on in this chart, but it shows that the lowest-ranked PFFs are far behind the worst-performing CEFs among the higher-priority actively managed CEFs. Masu. Nuveen Preferred & Income Opportunity Fund (JPC)had a much larger return of 62.9%.

At the top, John Hancock Premium Dividend Fund (PDT) The index’s performance has almost doubled.

It’s also worth reiterating the huge income stream these funds offer, with their yield averaging 8.5%, compared to 6.5% for PFF. And with such discounts, there is another inefficiency that us contrarians can exploit.

Of these preferred stock focused CEFs, more than half are sports discounts; Flaherty & Crumlin Preferred Securities Income Fund (FFC) has the highest discount rate among them, with its market price more than 11% below the portfolio’s value.

This is probably due to the relatively low (for a CEF) dividend yield of 6.9%. But it also means that investors who buy now and wait for market inefficiencies to end can earn capital gains on top of that impressive income stream.

And don’t expect FFC to eventually stop trading at a premium. That’s actually what happened. many Many times in our 20+ year history. As of 2021, the fund was trading at a price that exceeded its asset value.

For greater yields, John Hancock Premium Dividend Fund (PDT) The payout rate is an impressive 9.1%, and it also trades at a rare discount.

PDT once traded at a premium of over 20%, and double-digit premiums are not uncommon in recent years. The recent decline has pushed the stock into its deepest discount range in a decade, and the chart above shows this discount narrowing.

Of course, we’ve seen head fakes before, such as at the end of 2023, so PDT could return to double-digit discounts again. But that would be more reason to buy. Consider what would have happened if you had bought it four months ago, when the last time PDT’s discount dropped to double digits.

It accomplishes all this while earning a dividend yield of 9.1%. If that’s not a reason to go from passive to active, I don’t know what is.

Michael Foster is the Principal Research Analyst for: contrarian outlook. For even bigger income ideas, click here to check out our latest report.Undying Income: 5 Great Value Funds with Stable 10.9% Dividends.”

Disclosure: None